INSIDER TRADING

INSIDER TRADING

Subject: Economics

Context: The Securities and Exchange Board of India (Sebi) imposed penalties totaling Rs 70 crore on Reliance Industries Ltd (RIL), its chairman & managing director and two other entities for alleged manipulative trading in the shares of erstwhile Reliance Petroleum Ltd (RPL) in November 2007.

Concept:

• The RPL case has been hanging fire for the last 13 years. RIL had sold 4.1 per cent of its stake in RPL. However, to prevent a plunge in the RPL share price, the equity was apparently sold first in the futures market and later in the spot market.
• The crux of the Sebi notice is that the company was aware there would be a sale of shares in the spot market and hence, its sales in the futures market before that amounted to insider trading.

Insider Trading

• Insider trading is the buying or selling of a publicly-traded company’s shares/debt papers by someone who has confidential information about that shares/debt papers.
• Insider trading is defined as a malpractice wherein trade of a company’s securities is undertaken by people who by virtue of their work have access to the otherwise non-public information/confidential information which can be crucial for making investment decisions.
• When insiders, e.g. key employees or executives who have access to the strategic information about the company, use the same for trading in the company’s stocks or securities, it is called insider trading.
• An insider is a person who possesses either access to valuable non-public information about a corporation or ownership of stock equaling more than 10% of a firm’s equity. This makes a company’s directors and high-level executives insiders.

Mechanism to prevent insider trading

• According to SEBI Promoters will be held responsible for violation of insider trading norms, if they possess unpublished price-sensitive information (UPSI) regarding the company without any “legitimate purpose”.
• Legitimate purpose – Sharing of the UPSI by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.

Recommendation of Kotak committee

• The committee has recommended flow of unpublished price sensitive information (UPSI) shall be considered for ‘legitimate purpose’, and not an offence under the SEBI (Insider Trading) for those who:

Is part of the promoter group.

Has a nominee director on the board.

• The information should be pursuant to a formal agreement in accordance with the regulations.
• Communication of information must comply with the Insider Trading Regulations.